The International Monetary Fund (IMF) announced on October 4 that it has reached a staff-level agreement with Sri Lanka on the seventh review of the Extended Fund Facility (EFF).

Once the Executive Board approves the review and related conditions are met, Sri Lanka will gain access to 254 million Special Drawing Rights, equivalent to approximately $345 million in financing, bringing cumulative disbursements under the arrangement to about $2.7 billion.

Disbursement is contingent on a review of the 2027 budget and financing assurances. The agreement covers the economic policies needed to complete the seventh review, and the two sides also concluded the 2026 Article IV consultation discussions. An IMF team visited Sri Lanka from September 10 to 23, and subsequently held online meetings with senior officials of the country to finalize the agreement.

Executive Board approval of the review requires two conditions to be met: Sri Lanka's finance minister must present a 2027 budget to parliament that aligns with program requirements, and the IMF must complete its financing assurances review, confirming the financing contributions of multilateral partners and assessing whether sufficient progress has been made on debt restructuring.

Sri Lanka's current four-year Extended Fund Facility was approved on March 20, 2023, with a scale of approximately $3 billion. After this review is completed, cumulative disbursements will reach 2.032 billion Special Drawing Rights, equivalent to about $2.7 billion.

Economy Grows for Consecutive Quarters, Foreign Reserves Rise to $6.9 Billion

The IMF assessment shows that Sri Lanka's economy has remained resilient in the face of successive shocks. In the second quarter of 2026, the economy grew 4.2% year-on-year, marking 11 consecutive quarters of growth; by the end of August, total official foreign exchange reserves had risen to $6.9 billion.

The IMF also stated that the country's banks are well capitalized and remain profitable, fiscal performance in the first half was relatively strong, and debt restructuring has been largely completed. However, the financing assurances review will continue to assess restructuring progress as part of this disbursement approval.

A policy statement published by Sri Lanka's central bank on September 30 showed that real economic growth in the first half of this year was 4.7% year-on-year. In August, the current account returned to surplus after four consecutive months of deficits, supported by slower goods imports and improved tourism revenue and overseas worker remittances. At that time, the central bank kept the overnight policy rate at 8.75% and expected headline inflation to remain at a high single-digit level until the first quarter of 2027 before easing back toward the 5% target.

IMF Calls for Retaining Energy Cost Pricing, Targeted Protection for Vulnerable Groups

The duration and intensity of the Middle East war, changes in global trade policy, and the effects of El Nino weather are the main downside risks listed by the IMF. For persistent energy shocks, the IMF recommends that Sri Lanka allow domestic fuel prices to adjust in line with international prices and maintain an energy pricing mechanism that can cover costs. At the same time, the government should protect the most vulnerable groups through cash transfer payments targeting the poor.

The IMF requires that related support measures be precisely targeted, included in the budget, have clearly defined costs, and be time-limited, so as to avoid undermining fiscal and debt sustainability. If energy shocks trigger stronger second-round inflation effects, monetary policy should be prepared to tighten to prevent inflation expectations from drifting away from the target.

On fiscal reform, the IMF proposed formulating and implementing a medium-term revenue strategy to improve the efficiency and fairness of the tax system and provide investors with more stable policy expectations; at the same time, it called for improving public investment management, addressing bottlenecks in capital expenditure execution, and accelerating recovery and reconstruction related to Cyclone Ditwah.